This extract from a recent Federal Court decision sets out the fundamental principles which apply to restraints of trade at common law and by statute in New South Wales
“LIABILITY
Breach of cl 12(c) of the employment contract
237 The principal claim advanced at trial was a claim for breach of cl 12(c) of the employment contract. There was no dispute that the operation of this clause survived termination of the contract: cl 15.6(e). Mr Martin contended, however, that the restraint of trade in cl 12 was wholly or partly invalid.
238 At common law:
(a) a restraint of trade clause is contrary to public policy and void unless it can be shown that the restraint is reasonable in the circumstances: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, 565; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; 133 CLR 288 at 315;
(b) the onus of establishing that the restraint goes no further than is reasonably necessary to protect the interests of the person in whose favour the restraint operates lies on the party seeking to support the restraint as reasonable: Adamson v New South Wales Rugby League Limited [1991] FCA 8; 27 FCR 535 at 554 (Hill J); Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 700 and 707-8;
(c) the onus of establishing that the restraint is contrary to the public interest lies on the person seeking to invalidate the restraint: Herbert Morris at 700 and 707-8.
239 In New South Wales, whether or not a restraint of trade is valid in any particular case is determined by reference to the common law principles as modified by the operation of s 4 of the Restraint of Trade Act 1976 (NSW) (RT Act), which provides:
4 Extent to which restraint of trade valid
(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.
(2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy.
(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
(4) Where, under the rules of an association, a person who is a member of the association is subject to a restraint of trade, the association shall, for the purposes of subsection (3), be deemed to have created or joined in creating the restraint.
(5) An order under subsection (3) does not affect any right (including any right to damages) accrued before the date the order takes effect.
240 There is a question about whether s 4 of the RT Act modifies the onus of proof at common law – see: Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214 at [45]-[48]; Isaac v Dargan Financial Pty Ltd [2018] NSWCA 163; 98 NSWLR 343 at [75]-[78].
241 The correct approach to the application of s 4(1) of the RT Act was summarised by Gleeson JA in Isaac at [61] in the following way:
[61] The correct approach to the application of s 4(1) of the Restraints of Trade Act is well settled. In Orton v Melman [1981] 1 NSWLR 583 at 587 McLelland J (as his Honour then was) explained that first, the Court determines whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the Court determines whether the restraint, so far as it applies to that breach, is contrary to public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3). These principles have been approved in later cases including in this Court: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 328; Woolworths Limited v Olson [2004] NSWCA 372 at [42]–[44]; Jardin and Jardin Investments Pty Ltd v Metcash Ltd and Metcash Trading Ltd [2011] NSWCA 409 at [87].
242 This passage (together with Isaac at [62]-[66]) was set out with apparent approval in DXC Eclipse Pty Ltd v Wildsmith [2023] NSWCA 98 at [56] by Bell CJ (with whom Brereton JA and Simpson AJA agreed).”
AEI Insurance Group Pty Ltd v Martin (No 4) [2024] FCA 1110 per THAWLEY J delivered 24 Sep 2024